(Bloomberg) -- Across swathes of Southeast Asia, maturing palm oil trees, some as tall as a 12-storey building, are turning into a multi-billion dollar headache for local farmers, regional governments and consumers everywhere.
As oil palms approach their commercial lifespan of a quarter-century, they provide less of the versatile edible oil, used in everything from ice cream to cosmetics and fuel. Some plants become too ungainly to tackle for laborers, who rely on hand-held sickles attached to long poles. New palms, however, take several years to yield fruit in commercial quantities.
In palm-producing regions of Malaysia and Indonesia, where the pandemic led to a critical shortage of the manual labor on which the industry depends, an army of farmers has been postponing the inevitable. Squeezed by high costs and falling yields, many smallholders argue they can’t replant — and have no choice but to keep going.
The result is a significant delay to plantation renewal that will dent harvests in coming years, constraining exports from two countries that account for 85% of global production, which in turn may reduce profits for cultivators while pushing up global prices.
Oil World, a market researcher, warned last month of the consequences of an “alarming decline” in average yields due to slow replanting. Annual output growth may fall to 1.8 million tons or less in the 10 years to 2030, from an average of 2.9 million tons in the decade to 2020, the Hamburg-based outfit estimated. The El Nino weather phenomenon won’t help, and in the year ending September 2024, the annual output increase could be the smallest amount in four years.
“The concern is that the cost of production will become uncompetitive,” said Ivy Ng, head of plantations research at CIMB Investment Bank Bhd. in Kuala Lumpur. “The cost is going up, labor cost is going up, everything is going up — and yet your yield is falling because you didn't replant.”
Higher prices could also mean demand destruction, nudging large commercial buyers and households toward what are normally more expensive alternatives, like soybeans and rapeseed, especially in price-sensitive markets like India.
“In the past, palm was growing very fast and the advantage was the low cost,” Ng said. “But now you're no longer low cost and then you're still selling to the same market. So the question here is will the buyers be able to afford it? Can you pass on the cost?”
For governments, it may well add up to a multi-billion financial aid bill. Small farmers underpin the industry, accounting for roughly two-fifths of the planted area in Malaysia and Indonesia, and they form an important voting bloc. Malaysia’s top growers’ group is already seeking tax breaks and grants in order to accelerate replanting — going well beyond an existing loan scheme — and the country’s Minister of Plantation and Commodities Fadillah Yusof said on Monday the government would seek support for cultivators in this month’s budget.
“We have bid for certain funding for replanting, in particular for the smallholders,” he said on the sidelines of a conference in Kuala Lumpur. “At the same time, we're talking about initiatives for the big players for replanting, because now costs of doing business for palm oil and other agricultural commodities are increasing.”
Oil palms start bearing fruit at three years old, with yields increasing annually and peaking between nine to 18 years. After that, the volume of fruit starts to decline, and by around 25 years, trees are typically uprooted and replaced. But the pandemic’s labor upheaval and temptingly high palm prices last year — touching a record — have thrown off that schedule.
The Malaysian Palm Oil Association estimates 664,000 hectares (1.6 million acres), or about 12% of the nation’s planted area, consists of trees aged 25 years and above. It has warned that over a third of the planted area could be classified as old by 2027. The average cost to replace them is about 20,000 ringgit ($4,265) per hectare, or almost $3 billion, according to Chief Executive Joseph Tek.
Indonesia’s smaller farmers, meanwhile, can get 30 million rupiah ($1,937) per hectare for replanting, but the nation’s palm oil association says the actual cost can be as high as 70 million rupiah. Based on the current level of assistance, Jakarta may need to provide at least $5 billion to help with the replanting costs.
Among those caught in the dilemma is Jamari, who like many in Indonesia only uses one name. Having switched from rice to palm oil two decades ago, the planter owns two hectares in the Riau islands. But some of his trees are now 19 and 18 meters high, and the harvest is shrinking.
"There are fewer trees that still produce palm fruit," he said, adding that where farmers once had 132 to 143 producing trees in one hectare, some now have only 20. He estimated his crop at only 400 kilograms a month of fresh fruit bunches, a sharp drop from the estate’s prime.
The issue is not just financial, but raises structural questions. Environmental pressure on an industry that has often expanded at the expense of virgin jungle and forest has increased dramatically. Even if replanting does not involve fresh clearing, that means quicker — and ecologically devastating — options leaned on in the past, like clearing more land to boost production, are no longer available.
Then there’s the reality of plantation work. Sunflowers or rapeseed are waist-high row crops grown on flat fields that are suitable for tractors. In palm oil, by contrast, it takes teams of workers to cut down tightly packed bunches of fruit wedged between thorny fronds, each weighing between 16 to 35 kilograms. Even clearing planted land is more meticulous than long-used methods of slashing and burning, with cutting and chipping needed to avoid attracting pests.
“When prices are good, replanting is deferred. When prices suddenly fall, the pockets are empty and replanting is deferred,” said Carl Bek-Nielsen, the chief executive director of United Plantations Bhd. “It’s a vicious spiral.”
Founded in 1906, United Plantations is a top 10 producer in Malaysia with the highest yields among its peers. Bek-Nielsen says the company replants about 5% of its trees each year to maintain a “healthy age profile.” He says projections that put around 35% of Malaysia’s oil palm at 19 years or above by 2027 are worrisome, pointing out labor costs have climbed by at least 25 to 30%, along with spare parts and fuel.
Large producers are taking action. At Astra Agro Lestari Tbk's unit in Central Kalimantan in Indonesia, in a vast plantation of neat rows of palms, the company works with seeds that can yield harvests by the age of 25 months after planting, much earlier that the average variety, which takes three to four years. They are also researching varieties that could keep trunks to 10 to 15 meters, even as trees age.
Individual cultivators are moving less swiftly. In mid-2019, Indonesia’s Agriculture Ministry said 2.78 million hectares owned by smaller owners needed to be replanted because trees were older than 25 years, and the aim was to renew 540,000 hectares over three years.
As of August, according to Heru Tri Widarto, secretary general for the directorate general of estate crops at the ministry, only about 216,000 hectares had been replanted.
“The real danger is when vegetable oil prices come down,” said Bek-Nielsen. “In such a situation, we will see that companies with the lowest yields and oldest age profile are the ones who will be taken to the cleaners first.”
(Adds comment from Malaysian minister in paragraph 9-10)
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